U.S. Economy Shrank in First Quarter by Most in Five Years

Consumers returned to stores and car dealerships, indicating that the early-year setback was temporary. Here, BMWs for sale at a dealership in Santa Ana, Ca. Photographer: Patrick T. Fallon/Bloomberg

June 25 (Bloomberg) -- The U.S. economy contracted in the
first quarter by the most since the depths of the last recession
as consumer spending cooled.

Gross domestic product fell at a 2.9 percent annualized
rate, more than forecast and the worst reading since the same
three months in 2009, after a previously reported 1 percent
drop, the Commerce Department said today in Washington. It
marked the biggest downward revision from the agency’s second
GDP estimate since records began in 1976. The revision reflected
a slowdown in health care spending.

Consumers returned to stores and car dealerships, companies
placed more orders for equipment and manufacturing picked up as
temperatures warmed, indicating the early-year setback was
temporary. Combined with more job gains, such data underscore
the view of Federal Reserve policy makers that the economy is
improving and in less need of monetary stimulus.

The first-quarter slump is “not really reflective of
fundamentals,” said Sam Coffin, an economist at UBS Securities
LLC in New York and the best forecaster of GDP in the last two
years, according to data compiled by Bloomberg. “For the second
quarter, we’ll see some weather rebound and a return to more
normal activity after that long winter.”

Durable Goods

Another report showed orders for business equipment climbed
in May, showing corporate investment is helping revive the
economy after the slump at the start of the year. Bookings for
non-military capital goods excluding aircraft rose 0.7 percent
after a 1.1 percent drop in April, according to the Commerce
Department.

Demand for all durable goods -- items meant to last at
least three years -- decreased 1 percent, reflecting declines in
the volatile transportation and defense categories.

Stock-index futures declined after the figures, with the
contract on the Standard & Poor’s 500 Index dropping 0.2 percent
to 1,939.1 at 8:55 a.m. in New York.

Economists surveyed by Bloomberg projected a 1.8 percent
drop in first-quarter GDP, according to the median of 76
forecasts. Estimates ranged from declines of 0.5 percent to 2.4
percent. The economy expanded at a 2.6 percent pace in the final
three months of 2013.

This marked the last of three readings for the quarter. The
advance estimate of second-quarter GDP is scheduled for July 30.

GDP Forecasts

The economy will expand at a 3.5 percent rate in the second
quarter and average 3.1 percent in last half of the year,
according to the median projection economists surveyed by
Bloomberg from June 6 to June 11. For all of 2013, the economy
expanded 1.9 percent after a 2.8 percent gain in the prior year.

Consumer purchases, which account for about 70 percent of
the economy, rose at a 1 percent annualized rate in the first
quarter, the weakest pace in five years. The gain, which added
0.71 percentage point to GDP, compared with the previous
estimate of 3.1 percent.

The revision reflected a drop in spending tied to health
care services. The Bureau of Economic Analysis had estimated
that major provisions of President Obama’s signature health care
law would boost outlays. A quarterly services survey released
this month showed the assumptions were too optimistic. Outlays
for health spending actually slowed in the first quarter,
subtracting 0.16 percentage point from GDP. The Commerce
Department previously estimated those outlays added 1 percentage
point to GDP.

Inventory Building

Companies boosted stockpiles by $45.9 billion in the first
quarter, compared the $49 billion gain previously reported and
less than the $111.7 billion buildup in the final three months
of 2013. Inventories subtracted 1.7 percentage points from GDP
from January to March, the most since the fourth quarter 2012.

Final sales, which exclude inventories, decreased 1.3
percent in the first quarter compared with a previously reported
0.6 percent increase.

Aside from services, consumer outlays on goods also slowed
from the end of 2013, rising at a 0.2 percent rate. Demand
faltered as the northern and eastern U.S. experienced above-average snowfall from December through February, keeping
Americans closer to home.

Since then, households have boosted spending. Cars and
light trucks sold in May at a 16.7 million annualized rate, the
strongest since February 2007, according to data from Ward’s
Automotive Group.

Business Investment

The weather earlier this year also hampered production at
factories, which had trouble obtaining materials in time. Since
then, assembly lines have become busier.

Trade was also a bigger drag on GDP than last estimated.
Net exports subtracted 1.53 percentage points from GDP, compared
with a prior estimate of 0.95 percentage point.

Improving job opportunities are boosting prospects for the
economy. Employers added 217,000 workers in May following a
282,000 gain in April, according to the Labor Department.

FedEx Outlook

Officials at FedEx Corp., the Memphis, Tennessee-based
operator of the world’s largest cargo airline, are looking for
continued economic pickup this year and into next. The company
forecast 2.2 percent U.S. growth for 2014 and 3.1 percent for
2015, T. Michael Glenn, executive vice president for marketing
development, said on a June 18 earnings call.

“Our expectations for economic growth for the remainder of
the year have actually improved somewhat,” Glenn said. “The
global economy is recovering from the Q1 setback in the U.S. and
slowdown in China and should steadily improve.”

Price pressures remained muted in the first quarter. A
measure of inflation, which is tied to consumer spending and
excludes food and energy, climbed at a 1.2 percent rate.

Subdued inflation is giving the Fed’s policy making
committee room to keep the main interest rate near zero to
encourage lending and spur growth. Even so, the Fed announced
June 18 that it is paring asset purchases by $10 billion to $35
billion per month, showing that it remains confident that the
U.S. economy can make do with lessened stimulus.